Independent Dealers

Three Ways to Reduce the Risk of Used Vehicle Market Volatility

I like the analogy a Midwest Velocity® dealer recently shared as we discussed recent declines in wholesale used vehicle values:

“I try to manage my used vehicle inventory like a bobber on a lake. When wholesale values drop, it’s like a wave washes over the bobber. We’re underwater on some cars for a short bit, but we’ll flush them fast and acquire new cars to bring us back up to the surface. We’re basically riding the market rather than fighting it.”

This dealer is applying an investment-minded approach to his used vehicle inventory. Like a portfolio manager who spots declining returns on client investments and adjusts, this dealer quickly cuts his losses and reinvests his capital in fresh cars that offer a better potential return.

This approach runs counter to traditional used vehicle inventory management practices. Typically, tradition-minded dealers will hold onto used vehicles as wholesale values decline in an attempt to “retail their way out” of the slump. Unfortunately, this approach often makes a bad problem even worse.

“I’d just as soon take a loss if it’s a loss and move on,” the Midwest dealer says. “Nothing gets better with age. If it’s a $500 loss today, it’s a $1,000 loss tomorrow. Very few dealers seem to understand this.

“These dealers are then sitting with cars 90–100 days old. When the market comes back, they can’t do anything because they have to get rid of those cars,” the dealer says. “They have their hands in their pockets at the auctions. That means less competition for me.”

In recent weeks, I’ve had more conversations with dealers worried about how to address declining wholesale used vehicle values. Inevitably, these conversations turn to the way they manage their inventories, and whether they take an investment-minded approach to acquiring and retailing their cars.

The following are three best practices I recommend to help dealers “ride the tide” of market volatility rather than fight it.

1. Increase your inventory turn.

A growing number of dealers aim to sell at least 50 percent of their used vehicle inventories within the first 30 days of owning the cars. This “turn and earn” approach reduces the risks of wholesale value declines because these dealers do not own their used cars long enough for wholesale losses to accrue and compound themselves. As wholesale prices decline or retail demand softens, these dealers adjust their prices to move the affected vehicles quickly — and put their money in fresh cars that offer a better opportunity for a return on investment (ROI).

For example, the Midwest dealer aims to turn his 100-car inventory 15 times a year. This means he owns most cars for less than 30 days. He’s also a stickler for getting rid of cars that haven’t sold after 45 days.

“I just can’t stand having anything aged in my inventory,” the dealer says. “So we don’t.”

2. Mind your average used vehicle cost.

Industry analysts say overall wholesale values for used vehicles declined about 4 percent in spring / early summer this year. This market fluctuation would translate to a $1,000 loss on a $25,000 car, or a $400 loss on a $10,000 car. As dealers regard their used vehicles as investments, many are focusing on their average used vehicle cost to proactively mitigate the risks of wholesale or retail market fluctuations.

A benchmark: Many Velocity® dealers aim for an average inventory cost of $12,000 or less to maximize used vehicle department ROI / profitability and minimize risks from market volatility.

3. Use technology to keep pace with market changes.

It should be noted that the recent declines in wholesale used vehicle values didn’t affect every vehicle segment the same way. Some declined more than others and, in a few segments, wholesale values held their own or even inched upward. Such is the nature of an efficient and volatile market.

The good news for dealers: Today’s technology and tools can help you navigate these shifting market currents with real-time guidance to spot changes in wholesale market values and retail demand.

The Midwest dealer, for example, relied on inventory management tools to “flush” inventory that had lost its profitability potential due to declines in wholesale values. The tools helped him price the vehicles aggressively to speed his exit from the problematic cars — and preserve profitability where he could. Likewise, the tools helped him identify the fresh cars that offered the best ROI and profit opportunities in the new market.

In closing, I believe the recent declines in wholesale used vehicle prices are a sign that the broader used vehicle marketplace will see increasing volatility in the months ahead — whether it’s from declining wholesale prices or softening retail demand. Dealers who adopt an investment-minded approach to managing their used vehicle inventories will face fewer difficulties adjusting to these market changes than those who believe they can “retail their way out” of a profit-draining problem.